Kunal Shah & Shailendra Singh on Business Models & Moats

SHOW NOTES

• How to fight entropy and build an enduring business [05:18] 
• When customer centricity translates into a moat [16:00] 
• The luxury locus [19:19] 
• Why customer engagement is non-negotiable [21:44] 
• The source and significance of network effects [28:14] 
• Company culture: a manifestation of the founder [31:29] 
• Identify the good decision-makers in your company [37:04] 
• On choosing mission over process [41:45] 
• A structured approach to innovation and evolution [45:35] 
• Crucible moments hinge on good decisions [46:51] 
• Know what your time is worth [49:29] 
• On decision-making and the pitfalls of recency bias [52:36] 
• Seek out divergent opinions, break confirmation bias [56:24] 
• Diverse teams make better decisions [59:25] 
• An understated strength: Understanding human behavior [01:00:19]
• Embrace accidental innovations [01:17:45] 
• Audience Q&A excerpts [01:20:53]

TRANSCRIPT

Shailendra: Please join me in welcoming Kunal (Shah). Kunal needs no introduction. On a recent list, Kunal was India’s most active prolific angel investor. He’s a serial entrepreneur. Kunal, sorry to embarrass you; I know you’re not about volume at all. So, you know, Kunal is a very, very good friend for the last 11+ years. I got to know Kunal through a cold LinkedIn reach out to him, and then I had to persuade him to come take a meeting with us. But since then, you know, boy, have I learned a lot from Kunal and all of us have been shaped by his ideas and views. 

I think he’s one of the most prolific influencers in the ecosystem, and he’s a phenomenal founder. Many people may not fully appreciate what CRED is building, but you know, if employee NPS (net promoter score), if revenue growth, if you know, tons of traction, quality of investors, quality of talent was to go by, CRED is one of the most important companies in the making and we partnered closely in Freecharge and now we partner closely in CRED. It’s been a huge privilege for me personally and for our team to work with Kunal. So, I’m thrilled to have you here, Kunal.

Kunal: Thank you for having me. 

Shailendra: Today’s session has evolved a little bit from a session we ran in the past called ‘Business Models and Moats’. This session could run for three or four sessions, it’s a very very long topic. So, there are over 40 videos. Kunal and I have discussed business models and moats for maybe 100 hours, if not more, 200 hours over the last 10 years, maybe even more hours than that. So, you know, distilling it to one or two hours is very hard but we’ll try to capture some ideas. 

And what I am going to do today is, I have taken out, I call it ‘a master deck of business models and moats’ and distilled it down to the few most important things. And I’m going to lean more towards the ideas on how to innovate, how to make good decisions versus what are moats and what are the different kinds of moats. We’ll walk through very little of that today. So, I’m just explaining how we’ll try to run the session so that you can get the highest quality of takeaways. 

I will say one thing, in many ways, and maybe I’ll go out on a limb and say this, I think, things like value, culture, mission, that’s probably one of the most important sessions of Surge, the session we do on Founders’ DNA. Today’s session is similar. 

I think some key core decisions in your life will have massive compounding power of years of work. You know, like 10 years, 20 years of your life will be determined by a few key decisions. So think of today’s session as giving you some framework and ideas for making those decisions, but also then talking about how to consistently make good decisions in your life, okay? I could not overstate how valuable, how important that is. So, I think it’s a topic Kunal and I love discussing amongst us, we still keep chatting about all this stuff. So, some of the things we will tell you today are things we still spend lots of time, you know, discussing. 

We will talk a little bit…a few ideas on moats are important for you to know, okay. So we’ll talk a little bit about moats, and we’ll talk a little bit about just general business models and mutations, like how to evolve, how to change, you know, what is Act One, Act Two, Act Three in your business. You know, if you’re going to be building a stationary company, you are a sitting duck, like that’s yesterday’s view of how to build. We’ll talk a little bit about crucible moments and big decisions, and then decision-making in general. Kunal spews wisdom at an insane pace, and you know, for all of us, it’s huge learning every time we speak to Kunal. So, we’ll try to keep the sessions short and let Kunal share his ideas, okay. 

Look, in summary, there are many kinds of moats. Everybody knows what a moat is, okay. Moat is defensibility around your business. Moat can be a software product, your IP (intellectual property), your ease of use. It can be your design. It can be algorithms. It can be scale. It can be your ability to build a very low cost structure in a commerce business. It can be a brand, it can be network effects, it can be distribution and access to customers. And switching costs, once you create distribution and if you have switching costs, that can lead to moats. 

Community can be a very powerful moat, you know. And in Surge, we hope that the Surge community will become a powerful way for founders to help each other and then refer other important founders to Surge and we’ll be self-propagating. So, you know, DeepTech can be a moat and so I’m running through a list, just giving some quick ideas and examples. We will not talk about all the moats in detail but we will talk about very few. 

But the point is, if you don’t think about moats and how your business is defensible… Everybody is up for disruption, okay. It’s not ‘if’, it’s ‘when’ you will be disrupted. If you have to build an enduring company…We ran through the session on economic models and so on, and if you want to build an enduring company, you want free cash flow at scale, you will not get that if you don’t have business models and moats. You want high gross margin, you won’t get high gross margin if you don’t have moats in your business model. So, you know, those are manifestations of the power of moats in your business. The more the moats, the more gross margin you’ll get. If you are Visa and MasterCard, [which have] massive global networks, huge moats, you get highly, highly profitable companies. So, you know, a lot of what you observe in the financial statements of a company, in the metrics, are output metrics of how well you designed your business, how well you designed your moats.

How to fight entropy and build an enduring business [05:18] 

So, this is the strategic thinking that has to allow you to play the chess well to build a multi-decade company. You know, it doesn’t happen by accident. Kunal, I don’t know if there’s any things you want to add or any quick things here, but we’ll talk about moats and we’ll talk about how to think about moats. Moats are not one… You don’t think about one moat in isolation. You think about a sequence of moats. Are they self-reinforcing? In your Act One, Act Two, Act Three, are you going to add more moats later? How will you add more moats later and so on. And then we’ll talk about very few, three, four examples of moats. And there are few videos for you to watch offline. Kunal, I don’t know if you want to add some thoughts.

Kunal: No, I think first of all, we all are in the business of fighting entropy which will eventually happen to all of our businesses. That’s why Sequoia talks about backing enduring companies and not immortal companies, because there is no such thing as immortal companies. All of us will have entropy to our businesses, and there are some things that reduce the chances of entropy over here, which is explained over here: I’ll just double click on network effects. A lot of people often get confused [about] what network effects mean but in simple words, network effects are things that are, even at scale, constantly adding new users, and the benefit of the community is growing. 

The unusual network effect you will find is, let’s say [the] language English. More and more people are becoming daily active users of English because it becomes a common standard language for multiple people to come together and share their ideas, and as the world is becoming one, it has insane network effects, and it is adding DAU (daily active users) every day. 

And some businesses may not have natural tendencies to build network effects, but thinking about network effects is super important because ultimately you will end up paying a lot of money to companies that have network effects if you do not have network effects. 

Shailendra: I think network effects are very powerful. Guys, I want to show you one video. 

(Jeff Bezos’ on Customer Satisfaction. Video credit: CNBC; July 13, 1999.) 

[Interviewer] “Given the decades of wisdom that has built up in the business world, investors, it sounds like you’re saying, are making a big speculative bet if they’re investing in your company.” 

[Jeff Bezos] “Well, I think for all internet companies in the world, the stocks are incredibly volatile.” 

[Interviewer] “Even in the long term?” 

[Jeff Bezos] “I believe that it’s very easy to predict that they’re going to be lots of successful companies born of the internet. They’re going to have very large market caps and so on. I also believe that today where we sit, it’s very hard to predict who those companies are going to be. You can make bets on these things, and I think that Amazon…”

Shailendra: I am gonna pause for one second. What he just said is directionally, there’ll be a lot of companies, it’s very hard to predict which ones. Notice one thing. What Bezos is saying is basically probabilistic and not deterministic. He’s not saying we can be, or X can be, I don’t know the answer, which one will be, but what he’s saying is it’s hard to say which ones they will be today. And, you know, we have a chance. 

(Jeff Bezos’ Customer Satisfaction video continues) 

[Jeff Bezos] “If we’re not one of those important, lasting companies born of the internet, we will have nobody to blame but ourselves, and we will be extremely disappointed in ourselves. But there are no guarantees. It’s very hard to predict. If you go back and look at the companies created by the PC (personal computer) revolution. In 1980, you probably wouldn’t have predicted the five winners, the five biggest winners. There have been lots of winners, actually. So this space is a little different, and brand name may mean more, and then there’s some increasing returns, kinds of things, maybe more. But I believe that if you can focus obsessively enough on customer experience, selection, ease of use, low prices, and more information to make purchase decisions. If you can give customers all that, plus great customer service, and with our toys and electronics, we have a 30-day return policy. If you can do all of that, then I think you have a good chance. And that’s what we’re trying to do.” 

[Interviewer] “You’re not really a pure internet company anymore. And, you’ve got millions of square feet now, of real estate. You’ve got a huge and growing inventory of items. And you’ve got thousands and thousands of employees now.” 

[Jeff Bezos] “Yeah, we have over 3,000 employees and over four million square feet of distribution center space. And those are things I’m very proud of because with that distribution center space, and half a dozen distribution centers around the country, it allows us to get product close to customers so that we can ship it to customers in a very timely way, which improves customer service levels. That’s what we’re about. If there’s one thing Amazon dot com is about, it’s obsessive attention to the customer experience, end to end. And that’s what those distributions are [meant for].” 

[Interviewer] “But you’re not a pure internet play…”

Shailendra: Again, sorry, I’m pausing this for a second. Okay. Now, most people…you are listening to this video for its, I mean, insane clarity around customer obsession, serving customers better, but notice also that in 1999, Amazon is willing to make unusual business model choices, okay, by having its own centers, by having its own fulfillment and is willing to make very unusual business model design choices, which was not the norm by the way, eBay was that admired company in 1999. eBay was that asset light, pure tech company that was doing really well, and so on and so forth. 

And this company was making unusual design choices of their business model and sticking with it because they were saying we are more customer-obsessed, okay. So just notice how important this is, this clarity of purpose. And also the fact that there are very unusual design choices made at that point in time. There was no precedent of a tech company which [was] full stack with such design choices at the time. 

(Jeff Bezos’ Customer Satisfaction video continues) 

[Jeff Bezos] “And it doesn’t matter to me whether we’re a pure internet player. What matters to me is to provide the best customer service. Internet-schmeternet, that doesn’t matter. 

[Interviewer] Well, but it does matter to your investors to know whether they’re investing in a company that is…” 

[Jeff Bezos] “No, they should be investing in a company that obsesses over customer experience. In the long term, there is never any misalignment between customer interest and shareholder interest.” 

[Interviewer] “Well, that’s the same argument that somebody at Walmart would make as well, wouldn’t it?” 

[Jeff Bezos] “I don’t see why not. I think they should make that argument. It’s a correct argument.” 

[Interviewer] “Okay. So you’ll open as many square feet of space, physical space? You’ll have to hire as many employees as you have to…?” 

[Jeff Bezos] “To service customers. Absolutely. And we’ll do it as rapidly as we can.” 

[Interviewer] “That’s a very cost-intense proposition.” 

[Jeff Bezos] “Not compared to opening an equivalent network of retail stores. If you open a bunch of chain stores…Look, we’ve opened a distribution center. We’re opening places where we may pay 30 cents a square foot for a lease, instead of paying $7 a square foot, which you might pay in a high-traffic retail area. So when you compare those things, they’re not the same. You can’t compare a big chain of retail stores to half a dozen distribution centers. It’s just not…it’s bad math.” 

[Interviewer] “Either way, whichever side of the argument, you believe you’re making what it seems to me…” 

Shailendra: Again, I’m going to highlight to you guys, you know, he’s pointing out good math and bad math. We have discussed this in the past. A lot of companies do people make arguments, which are just bad math, and it’s very rampant. Okay. You must, must, must watch for this, but this is very interesting. You know, he’s combining lots of logical, rational arguments, probabilistic thinking, business model, design choices, and this customer obsession, which obviously has become distinctive for Amazon.

(Jeff Bezos’ Customer Satisfaction video continues) 

[Jeff Bezos] “There’s only one side, which is obsess over customers.” 

[Interviewer] “But it seems to me that both with the speed of your growth in terms of the number of stores online that you’re opening, the different businesses you’re getting into, the number of distribution centers that you’re opening and new employees you’re hiring, that you are making an intense gamble here, which is twofold. One, that you can run these numbers of businesses, different businesses, well. And two, that you can make money by selling vast volumes of products at essentially razor-thin profit margins.” 

[Jeff Bezos] “I think for the first one in particular I agree wholeheartedly, which is that there’s no guarantee that Amazon dot com can be a successful company. What we’re trying to do is very complicated. There’s huge execution risk involved. We have a terribly complicated business. We’re growing, historically, very rapidly. We’re opening new product categories. We’re expanding in new geographies. We have whole new business models with things like auctions. Now we think this is the less risky of the two approaches because scale is important in this business and it needs skill also to offer the lowest prices and the best customer service to people. So scale is important to us and we’re going to go after that kind of scale. But it does mean that the executional challenges are huge. And so, you’ll find a bunch of people back in Seattle and around the world working very hard to make sure we service customers at the level that they’re used to. And then even improving that.” 

[Interviewer] “Isn’t it to some extent, a certain amount of, with all due respect, corporate arrogance to assume that you can come into these businesses that you have no experience in and virtually overnight, enter a huge variety of different businesses and become the best in those businesses and the market leader in those businesses and execute those well. When there are other companies that have been running these types of businesses for decades, if not more.” 

[Jeff Bezos] “I don’t think so. When we first started, I started selling books four years ago. Everybody said, ‘Look, you’re just computer guys. You don’t know anything about selling books.’ And that was true, but we really cared about customers. And now, we know a lot about books! And when we first started selling music, people said the same thing, but we hired the right people. So we don’t do this in a vacuum. We go out and hire the best industry experts in each of these categories. That’s the same with toys and electronics. We take this very seriously. We take the commitment to the customer very seriously. We’re not about to release something or announce something before it’s ready.”

Customer centricity as a moat [16:00] 

Shailendra: Okay, folks. So look, just wanted to show this video in case you haven’t seen it, I’ve seen it more than 10, 15 times. It has really shaped my thinking on many dimensions over the years. And I think many of your companies, if you had this, just one quality of this obsessive customer focus, and you could work backwards to build a good business around, it will be successful. This is another kind of soft moat, almost a cultural moat, [and] this obsession on customer centricity can translate into moats as well. 

And you know once your culture gets completely obsessed about this, it becomes very powerful, but a lot of people make mistakes. They mistake this to mean that, give discounts or please customers, this doesn’t mean you give customers by selling below costs. This means you deliver outstanding service. You build a set of business model choices that are superior for customer experience. Kunal, I don’t know if you want to add something about customer experience, you guys are very obsessed with user experience and so on. 

Kunal: There are multiple dimensions to what customer obsession means. A lot of times, people confuse that only by having, I call it ‘the servant relationship’ where you can create a high experience. It basically means that only when I worship the customer and I really take care of them and I really make sure that they have…think of this as an experience going to an Oberoi hotel, [that] kind of a thing, as the only way a customer will like you, but there are multiple dimensions to this. If the customer feels great by being associated with you, that’s exactly the opposite of being a service brand, right. 

The thing is that…the summary over here is that do the customers feel [like] better versions of themselves after experiencing your product? That’s the crux over here, and there are multiple ways to achieve that. And does that experience make them feel better?

One interesting thing to think about is, I was earlier discussing with Shailendra also, that there’s an interesting pattern in all the apps that have huge DAU (daily active users). It is that all of them reduce your stress, right? Every product that you use on a daily basis for a lot of time, has a unique trait of reducing stress. And therefore you like to go back to it, an escape from your life and your trauma and your pain, and go to these places which reduces your pain. And a lot of times, people underestimate that there is nothing called customer service and excellence in some of these things, it’s just designed to reduce your stress and be obsessed about that. And the thing is that, a lot of times you can create interesting dimensions to your business.

The luxury locus [19:19]

In fact, I have noticed a very interesting pattern in financial services. People naturally respect the brands that seem out of reach and bigger than them. 

And you may have an extraordinary experience when you experience that brand, but it does not talk to you, it’s not approachable. It’s not trying to tell you that, “We will serve you the best no matter what,” kind of a thing. And there are multiple dimensions to think about this. But when the reason to come and the reason to stay are different, right? You may get attracted to different propositions, but if they have a non-favorable experience, they might leave. 

But there’s an interesting dimension that I have recently discovered is that luxury products purposely make their products flawed. And that’s an interesting dimension, I have studied that. For example, luxury cars are purposely not the best on experience, in some dimensions. And they purposely add a few flaws because there’s a belief that ‘only when you are willing to accept me with my flaws, you will worship me.’ And that’s the luxury marketing dimension. And funny enough, all the profits exist in vanity, and utility has a curse of profits disappearing consistently, right. If you look at products that have offered utility, they will keep seeing shrinking margins, but products that offer vanity have constantly increasing margins. And therefore there are multiple dimensions to think about this. 

And, I’m also evolving and realizing that there are two axes through which you can create wealth in a startup. One is the axis of motivation and second is the axis of ease of use, right? A lot of tech companies have built wealth on this axis. Most engineers can think in this axis, but all the gross margin somehow exists on this axis. And I think, FMCG (fast moving consumer goods) companies, luxury companies, vacation companies, and the best founders that I have seen, can operate on both these axes. 

So my request to you is that if you have to think about a business that is a better version of Amazon, you have to operate on both the axes, because what Amazon does is that whatever you desire, it makes it extremely easy for you to get what you desire. But Amazon’s ability to create desires is non-existent, one would argue, right? 

Why customer engagement is non-negotiable [21:44]

Shailendra: So we won’t discuss all moats today, folks. We’ll discuss one or two very simple moats. One of the most powerful moats around which business models get built is this idea that historically people always said, “Content is king” in the media industry. And then, you know, you should add that distribution is god. So, you know, lots and lots of business models today are built around distribution, including CRED, which is this idea of bringing high quality users or users onto a platform first, then subsequently finding ways to monetize. 

Now we find that in distribution—by the way, and in SaaS, this shows up as PLG (product-led growth), PLG is distribution—when you can build a freemium platform or when you can find a low-cost viral way to get a lot of users, that’s distribution. So both consumer businesses, SaaS businesses have moved in the direction where really distribution is the holy grail. When you build a distribution, it’s possible to build a very valuable company.

Now, one thing that happens is everybody now broadly understands that distribution is super powerful, very strategic, very powerful. The thing that people underestimate is distribution alone isn’t powerful. Distribution with poor engagement is sh*t. There’s no point. A lot of companies have leaky buckets. A lot of companies chase distribution with poor engagement. A lot of people… distribution is like a little bit of vanity. If you have distribution and engagement, then that is god, that combination. So, Kunal has a huge hypothesis on engagement. Kunal, I want to have you talk about engagement.

Kunal: Content is king, distribution is god, and engagement is truth. Time to update the slide. And this is an evolution that has happened, the slide is an evolution. So, I’ll talk about engagement. This has been something that I wrote as a note and a memo to my team. And I shared that with Shailendra as well. And this is a big realization of life, often we confuse distribution as everything, but engagement is the truth. And I’ll kind of move away from distribution and talk about engagement for a while. 

If you notice early signs of a relationship not working out, and any form of relationship, employee-employer relationship or romantic relationship, it is ‘decline of engagement’, when you are doing lesser things together than you are used to, and you are sharing less emotional experiences together, right? And you’ll notice that you can predict churn as soon as…I’m sure you guys have all been through a relationship where you saw that [there] was an early sign of… and you still keep things intact. A lot of people are in legal constructs which keep them together, but there is no engagement.

If you notice this thing, banks have had this unique engagement ability. A classic example is withdrawing money from the bank was an engaging relationship. And what did all the banks do? They put the ATMs outside the bank branch to be available 24 hours. So they took [away] the engagement feature…Imagine you have an app which has an engagement feature that is working and you’re like, “Oh, I should make a separate app for this engagement feature” and you move it out. And then nobody comes to the branch anymore, which used to be our mechanism to cross-sell, right, because the engaging part disappeared. So what we notice is that engagement’s truth is in sharing experiences. 

Let’s take an example, at CRED we have around 25 Slack channels that have nothing to do with work. They are about playing badminton, memes, library, music, lots of other things that people engage in. And every weekend we conduct either a speaker coming from outside or me or some other leaders are teaching some concepts. So I have a session with the team at three o’clock where I’m teaching about…teaching persuasion, because I realized that most people who are starting from an Indian academic background do not learn the skill of persuasion. So [I am] teaching persuasion to the group. Now this is engagement, which is different than, here is work, here is salary and disappeared, right? 

An engaged community, they’ll have multiple dimensions through which they will connect. They could be playing poker together…And therefore working from home is a unique place, where you are going to struggle to build engagement with your team members, and I’m going all over the place to explain the concept of engagement, because it is exactly true for your business. 

If you are not having an engagement, an engaging business, you will realize that you are constantly paying money to other engaging businesses to get people to come to your app, not just your app, but also come back to your app.

Another angle to think about is that engagement also creates a natural tendency to create trust. If you study enough on how the brain works or neurons work, is that any person or any brand that we experienced 17, 18 times, and it does not do harm to us, it becomes familiar. The word ‘familiar’ comes from family and therefore naturally fearing them reduces. So most engaging companies are naturally feared less, which is the biggest blocker a lot of times for people to trust something, right? 

And you’ll notice a pattern that it’s never the tech companies that disrupt the big companies, it is companies that create more engagement, disrupt more. And this should tell you that engagement is this black hole that can suck every single use case. 

If you want proof of it, look at your phone, which is a graveyard of many physical products that exist in the world. Camera, calculator, contact books, these are really physical products that existed [standalone] in the world. And as the engagement got sucked and it moved over here, and this has become the graveyard of all the products that existed in the physical world which had engagement. So, what I’m trying to tell you through this is that if you do not think about this, all of your businesses will end up paying a huge amount of toll [to the] businesses which have engagement in.

The source and significance of network effects [28:14]

Shailendra: Kunal, thank you. Look again, I think, like Kunal said, “Content, distribution, engagement.” Kunal already talked about network effects. Look, these are apparent to us in many ways. 

Companies that can successfully build network effects have very massive, powerful moats. This is one of the moats that tends to be very powerful. This moat also often tends to be misunderstood. The summary is, it’s worth understanding network effects deeply. And it’s worth understanding whether your business has, or does not have network effects, but network effects can be applicable to all parts of your business. 

If you are a software company, but your community is very loyal, that’s a network, you know. That’s a network of users who are willing to commit or be emotionally attached to your product, or they are fans of your product, or for whatever reason. If you have a network of trainers on the platform who are coaches, that could be a network, where the community of coaches becomes a powerful network effect. And they refer other customers and your customers can create network effects.

I think a lot of companies are trying to…Now there are weak and strong network effects. Sometimes companies with weak network effects claim to have strong network effects. Sometimes companies have strong network effects, but they prove transient. For example, Uber had very strong network effects, it was a transport company and more supply meant better experience for demand, and more demand meant more money for supply. 

So network effects like distribution and engagement [are] very powerful moats. 

And like I said, there are non-tech [network effects]. Phone lines, ultimate network effects. Like, if people don’t have phone lines, what’s the use of a phone? So when the presence of more nodes on a network increases the value to all other nodes, that’s called network effects. 

Okay, languages, if people don’t speak our language, what good is your language? You start dying down. Currencies have network effects. So lots of traditional things are also built around the network effects. This is like I said, [this is] a subject to be aware of and studied. 

Like I mentioned, look, community is a very powerful moat. One of those soft moats that one can have. And there’s an example from CRED, but I think we have talked a little bit about community. I think the thing that people don’t understand is moats are transient. Some moats can be very sustaining, but many moats can also be very transient. And unless you actively work to think about Act Two, Act Three, or reinforce those moats with other strategic things you might do, moats can eventually be overcome. Like for example, you could have started a network effects business and it would have network effects, let’s say, in Uber or Ola, but then if somebody else showed up with a lot of money and gave a lot of subsidies, it may overpower your network effects using…and build their own equally large network, for example. So, the way to think about moats is, no moat is permanent and no moat can give you a multi-decade advantage, but moat gives you a point in time advantage to build a company. Like all models will eventually get copied, and Kunal and I always say this, “Rarely are there any new ideas.”

Company culture: a manifestation of the founder [31:29]

Folks, coming back, look, moats are transient. Even network effects moats can be transient if a dramatically superior product comes along. You know, you have to keep evolving and changing, and think about how not to get disrupted. 

You know one big question we always have is, capital is not a moat most of the time, until it is a few times. So capital can be a deterrent, a moat is basically a deterrent. If your competitor raises $500 billion and is hell bent on discounting, other people will be scared to enter your market and territory and so on. So the problem is, capital is a moat that also has a lot of other collateral damage. So you think that you’ve got a moat because you hurt your competitor, but what you don’t know, it’s also toxic internally. 

So if you got $500 million, how do you keep your culture frugal, well, your people start spending and wasting a lot of money then. Over-capitalising companies makes it super hard for leadership teams to keep a frugal, grounded culture, lots of wasteful spending, and very hard to correct. 

If you do high burn for prolonged periods, I think I’ve been saying this for a few years now, and unfortunately it’s hard to persuade founders because the founders get more and more focused on competition, but companies that have prolonged periods of high burn can rarely build a highly profitable business. 

Here’s the other thing. Look, there are lots of very important, powerful, soft moats. Most of the soft moats are underappreciated, underleveraged. And you know, this is what actually leads to greatness, if you ask me. I think functional moats…you have superior IP (intellectual property), it’ll get copied in one or two years. You have superior… you have cost advantage, it’ll get copied in one or two years. You have better sourcing capability through foreign something, it’ll get copied eventually. So it’s not like a lot of functional advantages can sustain, but the culture to innovate can’t be copied. 

If you’re always ahead, then it’s in your culture to innovate, it’s in your culture to listen to customers…The reason I showed Jeff Bezos’ video is, it’s very clear that it’s deeply ingrained in their culture. Now, they might do 500 small things to improve user experience. That becomes hard to copy. You can say I’m also customer centric, that doesn’t mean anything. But if it becomes cultural, what’ll happen is, it’s in your values, that’s in your philosophy. It’s what inspires people. Then you will do so many small things when people are not in the room, people will make decisions that are directionally aligned with your culture, your values, your philosophy. So, down the org, there’ll be a hundred, thousands of small things done, these are soft moats. Moats that are coming from cultural soft moats where so many small choices will be made in support of your mission.

Let me give you a small example. I’ve done two weeks consecutively of check-ins with founders and we heard from Surge founders repeatedly that, “Look, so many Surge team members go out of their way to help us, to win, succeed. Like why would they do that for us?” That is cultural to us. Rajan (Anandan) and I don’t tell the team saying, “Hey, you need to do this on Friday night. Can you please stay up at 11:30 pm? You need to stay up.” This. Let’s do it. It’s a shared culture. It’s our shared value. Let’s do everything in our power to make founders successful. Nobody says, “Go make the micro decisions.” Those micro decisions are made by each of our team members on their own. And the power of that compounding is felt by our founders who go through the Surge programs. 

So I’m just sharing with you guys, how philosophy, values, culture, or teamwork, [and] alignment makes a massive difference because suddenly the moat has shifted from saying that we will do something or doing something functional to our teams acting in a certain manner, in pursuit of our mission together. Most people again, dramatically under appreciate the power of the soft moats that you can create in your organization. 

Kunal: I’ll touch upon culture particularly. This market has been crazy because there are probably 100+ unicorns that are trying to get talent. They will go to the next king who offers them more and move to the mission that they offered them versus a missionary company creating a shared mission. And you feel a part of you will go away if you leave a mission unaccomplished, right. And I think this is the hardest thing I’ve seen in founders. And the lowest time that they invest on this. 

Culture is something that has to be deliberately done. And every single company is a reflection of the founders. You may not write what your cultures and values are, but every single thing will become a shadow of what you are. And it’s scary how much of a shadow it becomes. Every now and then you realize that people speak like you, people think like you, they are trying to mimic you and be like you. So all your flaws will get dramatically exaggerated in your teams. So unless you become a better person yourself, through this journey of the startup that you are going through, your company is going to be the same. And startups are the fastest way to know who you are. So one request that I have to many founders who are probably doing startup for the first time over here, do not miss the opportunity to meet yourself, because only when you meet yourself and know yourself, you will fix yourself like a product, and you will know your bugs, you know your features, you’ll enhance your features, you will fix your bugs. And that’s exactly how your org is going to be, a huge holographic image of who you are. So be really careful.

Identify the good decision-makers in your company [37:04]

Shailendra: Yeah. I’ll just echo that. Look, being a founder and being a good leader of a company that is going to have an impact is a journey in understanding yourself as much as it is an intent shaping your org. So, self-awareness is a massive superpower, which is what Kunal is describing as understanding your own bugs and your own features.

Look, the thought is your design choices of your company have a dramatic implication. Bezos could have chosen not to go down the path of being full-stack, quote unquote, but moats compound on top of each other. Good, smart thinking about moats, your strategic position will amplify your advantages. 

You know, sometimes companies do harakiri. Like Kunal explained how banks put ATMs outside instead, “Look, we’ll build a network of convenience,” but they lost the functional relationship. They lost the power of the relationship with their most valuable customers because, you know, the relationship became highly transactional, you can walk up to an ATM and there was no other way in which you now experienced your bank.

Anyhow, sometimes people don’t think about the choices of product extensions and so on and will blunder with the choices they make. It’s very important to think about whether the moats you’re building and the choices you’re making are self-reinforcing and acting in concert together or not. And that’s why we use this phrase, “The design choices that you make as a company are going to disproportionately shape your next one or two decades of work.”

Kunal: If I can touch upon one thing that every now and then there’ll be a temptation to give up on your moat by saying that, “Oh, this one is doing well. This one is doing well,” that usually comes when you have not really understood what you are. For example, at CRED, we made a choice that we’ll focus on a certain segment of customers. And it’s not that every month we don’t deal with this dilemma that, “Oh should we open it up? Should we open it up and get more people?” But the soft moat that we have of only addressing a certain type of members and they associate with them being separate, is just insanely more powerful. And it was very scary because [for the] first two years we did not monetize. It was just the belief that these customers will monetize the most, and as we got to monetizing, it came true, but holding onto that belief that it will power through that comes from some amount of conviction.

Shailendra, if I can touch upon one most important Amazon value is… Amazon has 14 leadership principles, the one that is the most important one is called being ‘right, a lot’. And it’s the most under-appreciated leadership principle about judgment. Judgment is not natural to a lot of people. Judgment is the ability to make great decisions with least possible information compared to other people. And it’s the hardest skill to teach. 

Imagine trying to teach somebody how to invest in startups that will become unicorns. It’s so hard. And therefore the judgment piece of it is something that you will see great leaders are also great at hiring. They’re also great at making great business decisions. They’re also great at making the right choices at the right time. They’re also the best ones to say, ‘Oh sh*t! The market has gone to sh*t! I’m going to cut the burn first.” Their ability to make judgments is usually 360 degrees. They’re not selective in making good judgments on, “Oh, this guy is very good at making judgements on products, but sh*t in everything else.” That is a sign of not [being] a great leader. So what I would request is that, harvest the people who are showing good judgment, never let them go because if you concentrate those people at the top, you will win, because they will make great decisions for the company in your absence consistently. And unfortunately, it’s going to be only 1% of your team.

So my request for all of you is to start thinking about this. And I’ve seen two correlations of people who have high judgment, and it is, I don’t know if there are causations or not, one is, people who have played strategy games in childhood, of any type, which required them to think in multiple dimensions. And the second thing I have seen as a correlation is second order thinking. Can people think in second order and third order flow? 

On choosing mission over process [41:45]

Shailendra: Let me keep going forward. Look, there are four or five mega models. Again, we won’t spend too much time on it. Advertising, marketing is a mega model. A lot of the tech market cap belongs to this, whether it’s Google, Facebook, Tencent or Alibaba, the largest market cap companies in the end are all, to Kunal’s point, they are engagement platforms, and other people pay them to get users. 

So eventually the engagement platform will suck everything, both B2C and B2B. You may think this doesn’t apply to you, [but] it applies to you. Cisco or pharma companies, the companies that have distribution that built the engagement platform eventually buy the companies that build products. Cisco builds distribution, then eventually buys the companies that build the product. And in software security, this is rampant. Everybody who has a lot of customers is eventually going to buy the new company that builds a better product. You may not call it advertising, but you could call it access to customers, but it’s the same thing. You’re paying a toll for getting access to customers. You could pay it as… It could manifest in the form of CAC (customer acquisition cost) paid, it could manifest in the form of eventually selling your company to access the customers of a bigger company. 

Financial services and FinTech is a mega model. Mega, mega, mega model. A large percentage of market cap exists in this. This is the lifeblood of economies. And, one of the largest parts of market cap created in emerging markets and domestic markets will be in financial services and FinTech. Subscriptions is a mega model. The more businesses you convert to subscriptions, recurring payments, habit-oriented consumption. You know, and all of SaaS, many parts of even consumer, content, media and Netflix are all subscriptions. There are four or five mega models. Again, full-stack market versus marketplace in financial services are these mega models. You know, commissions are going down everywhere. People are transferring commissions by saying, “Hey, let me drop commission. Drive engagement. Engagement will lead to trust. Trust will lead to my ability to do financial services.”

So you can look at so many consumer products, B2B (business-to-business) commerce, so on and so forth. You meet every company, “How will you make money?” “I’ll make money eventually through lending, you know”. “I’m just allowing people to transact on my platform so that I can make money,” or, “I sell cosmetics, but I make money through ‘buy now, pay later’ and use that to drive demand.” So it’s actually… This is very rampant and it’s surprising that founders haven’t distilled some of these things down sometimes. They may be in a business, but they don’t understand the drivers of how the mega models will eventually play out for them, like how the main model will really play out for them. 

These are all frequent ways of mutating… So first look, if you’re not open to changing your business model or mutating, that’s a huge mistake. The first thing I would say is, you know, don’t be a sitting duck, don’t get too married to your own ideas. Get married to your mission, get married to your long-term objective of what you are trying to serve, the purpose you’re trying to serve. Don’t get married to how you serve it. So I think the best founders are very open and creative about serving their customers in new and better ways all the time.

So mutating your model is almost like everybody has to do it. And especially because if you don’t mutate, you’ll be copied anyway. So what you think works today, will stop working in two or three years and somebody will have an equal amount of money or enough money to make your life difficult. 

So, the pursuit of building moats and mutating your model is an ongoing journey. You have to do this for decades. You could become Google or you could be Amazon, but if you didn’t build AWS (Amazon Web Services), you know, you wouldn’t have the market cap you have today, if you didn’t build Kindle, and so many other things. And then once it was clear that AWS is such a big business, like Google has built and Microsoft has built it and so have others. So, you know, evolving and mutating is no longer optional. This is almost needed. 

A structured approach to innovation and evolution [45:35] 

Now, how do you do this? There are a few very standard ways to think about aggregation and disaggregation of products and services. Pricing-driven mutations: Do you make your core products free versus paid and go to PLG motion, therefore, you’re going to get lots of distribution. Do you build a distribution-first business, meaning you have a lot of free users or do you go for, “Oh, I only do business if people pay me only those are your customers.” 

There are these ideas of TAM (total addressable market) expansion. You build a huge company, but you don’t want to stop at $10 billion. If you don’t have access to the global market you have no path to building a $50 billion or $100 billion [company]. And so you will do things for TAM expansion when you become bigger. Should you be a marketing layer, or get into transactions? All the layers of marketing have transformed into transactions. Should you be a tech layer or full stack? This is Amazon or eBay. Should you be full stack or marketplace? So there are some standards, call it business modern mutation options that will exist. And again, I think we won’t go into all of them in detail, I just want to highlight to you, this will happen. I think more important is to understand when and how to change. So the fact that you have to change is like some no-brainer.

Crucible moments hinge on good decisions [46:51] 

So I’m going to focus the rest of today’s session on how to innovate, how to evolve. And, this is the key thing to understand: Your company, your culture strategy, your values, you know, they are the roots of your tree. And then the dark wood on the trees are crucible moments, when tough, very key core decisions that will shape your journey get taken. When wood is the hardest, that keeps a tree together and then lots of stuff on top you might change over time. Your product might change, your growth marketing might change, your GTM (go-to-market) might change. You may want to try new traction channels, all of that stuff. But the crucible moment is the dark wood where very important things happen. 

Crucible moments are the points in your journey where Kunal was referring to, you make that one or two core decisions and then the company takes off. It could be a new product launch. It could be a new GTM thing you figure it out. It could be you change the strategy of, “Do users need to log in to use my product or not.” And that little friction changed the arc of network effects in your company and so on. So, these crucible moments, every company goes through them. These crucible moments are make or break moments. 

And actually there are many smaller decision points too. There are hundreds of important small decisions too, which have a compounding power, but there are a few crucible moments. And crucible moments can have mergers and acquisitions, business model transition, product line extension, geographical expansion. You’re chasing profitability or growth, that can be a crucible moment. 

Technological shifts can bring crucible moments. The shift to mobile was a big crucible moment, the shift to cloud is a big crucible moment for all companies and enterprise software. The shift to open-source is a crucible moment, meaning that, you know, are you going to go open-source, are you going to not be? So, all of these are examples of crucible moments. 

But again, rather than going into any one of them in detail, I want to talk about this thing that Kunal talked about: Crucible moments hinge on good decisions. Good decisions have dramatic power to transform your company. First, you, the leader must make very good decisions and then your core team must make very good decisions. 

So how do you improve decision-making? Obviously you want to do data oriented decisions and so on. But there are some hacks of good decision-making. And let’s talk about some obvious things that people do well or badly in the decision-making. Again, Kunal, I don’t know if you want to come in on some of the topics. 

Know what your time is worth [49:29]

Kunal: I would just say that, the most important thing that you will be doing, a lot of founders think that their job is to work and lead by example. And it’s the stupidest thing you can do, because all your job is to really take the crucible and the most important decisions of the company. 

One framework I would request, all of you to think about is start assigning some value to your one hour of time. And you can ask your finance guide, they’ll come up with a model to tell you what’s your hourly value of time. And every hour that you spend at work, ideally you should generate more value than the hourly value that you have today. And that hourly value will keep going up if you are spending the time on those things.

And some of that, funny enough, is thinking. And most founders are busy because they need to show that they’ve worked very hard to the team, but your job is to take really good strategic decisions for the company, and being well aware about what’s going on in the world and not get lost in your calendar. But the standard thing is the problem of being on the chess board versus seeing the chess board. To make great decisions you cannot be on the chess board. You have to see the chess board, which includes you, and your competition, and the ecosystem, and the consumer behavior the way they are shifting, unless you are zoomed out. And a lot of times I’ve seen the founders who have done well by working hard in life, they keep working hard in life and there’s no time to think, no time to strategize and really, really important things are lost in that. 

And specially in Asia, I have seen this pattern to be…We feel guilty for chilling. We feel guilty for thinking, but you’ll notice one thing that as soon as you take a break, it goes more long term, two, three years out. It goes in the past also about your terrible hiring decisions. If you’re busy, you will never let go of that person. If you’re busy, you will never hire that person that you always wanted, because you’re busy. And one of the underrated things about improving decision making is time to think, because long-term decisions are scary, and you need time to think and mull over it and sleep over it for it to get formed in your head. And most people are just way too busy to make great decisions. 

I’ve seen busy founders rarely create high-quality decisions consistently. They can get lucky, by the way. Every founder, once in a while, gets lucky. A random business model, random innovation, random one-team member built a feature that took off, but it’s not a sustainable engine, unless you are playing the art form of playing long games in the company.

On decision-making and the pitfalls of recency bias [52:36]

Shailendra: Yup. Super powerful, super powerful. Couldn’t agree more. 

I think Mike (Michael) Moritz or somebody coined it, he said, “We are only as good as our next decision.” Okay, so everything, everything, all of our success, everything we did yesterday is in the past. But today, if you look to the future, you’re only as good as your next decision. So a very powerful way to think about it. It just doesn’t apply to investing and it also applies to your business and your judgment, who you hire, what you do, who you raise money from. 

And the thing we find super surprising is that most people have not internalized how important each of these decisions is. And they get stuck in the process or they get stuck in recency bias, or somebody gives them a term sheet. So they accepted the term sheet, or there’s some anchoring in their mind that “I must raise a certain amount of money,” or “I must raise at a certain valuation.” All their old ideas and so on influence their thinking more. Their own psychology is playing tricks on them, preventing them from thinking first principles. 

Like the current market environment. A lot of founders right now will say, “I’ll only raise money if I can at the last round’s price.” Well, that’s just anchoring. That’s just like what happened in the past? Why is that the right answer about what’s going to happen in the future?

So again, I’m just giving you examples. But having true first principles decision-making and understanding the time value of decisions alone can be the most valuable thing you take away. If you internalize the idea to play back a decision always in your mind, and ask yourself, “Will I regret this in two years? Will I regret this in five years? Will I regret this in 10 years?” Just that little hack will take you one notch higher on making decisions, number one. Number two, a lot of decisions, you just don’t need to make. People feel rushed to take…People feel like, “I’m executing, I must keep executing.” To Kunal’s point, they feel busy. They feel like, “Oh, I must move fast.” There are all these things that are taught in the startup world, which are misunderstood, they are taken out of context. Yes, you should move fast for the execution of items. No, you should not move fast during crucible moments. During crucible moments, you should take your time. Reflect, think, make careful decisions, they will impact 10 years. What people don’t understand, sometimes, in the spirit of moving fast, “I must close it. I must get back to building,” they will make all these bad choices and they’re not giving themselves the chance to reflect and think.

And under somebody’s pressure, some investor made you an offer, you must take the offer today, the market is changing…Again, I’m just telling you so many criteria I hear from founders, which are all point in time, and I always ask founders, but first, two axes of time, one, why not give yourself more time to make a decision?

Kunal: It’s very hard to generate respect if you change your core principles very quickly because you read one book. You can see a founder who just likes reacting to every stimuli that exists in the world. Classic thing is, “Oh sh*t! Our competition has launched this, I’m going to ship this in seven days, even if it is sh*t and I’ll show them.” And I’ve seen that to be the classic curse, where teams also love giving shallow products to the founders because many of them start chasing PR (public relations) and announcements that [say], “We have launched this, we have done this.” And it’s a huge curse on teams that never built products that gathered volume of customers and built traction for a long period of time.

Seek out divergent opinions, break confirmation bias [56:24] 

Shailendra: Look, as a founder, if you can slow down your pace of decision-making when it’s very important decisions and be fast when it’s less important decisions that’s… So the time axis of making your own decisions is one hack. And the second is the time period for which you are making those decisions, okay, two different time hacks… Just these two time hacks can improve your decision making pretty dramatically. So understanding are you impulsive? Are you thoughtful, are you risk taking, are you not risk taking, understanding yourself and then modulating the time axis with which you will make decisions and the time period for which you are deciding. Sometimes, just asking yourself, “Will I regret this in two years? Will I be happy if I made this decision in five years?” Super easy, you will make better decisions if you just give, if you just think time out, time in. And then the more you can go away from process-based decision-making, anchoring bias, recency bias, confirmation bias of your own ideas, the better off you will be. 

Kunal has something very interesting. I won’t say the name of the team member. There’s a team member, who he thinks is very good at finding flaws in arguments. So every few months he calls him and says, you know, “Tell me I’m thinking about this new idea, tell me what I’m thinking wrong,” because he’s looking to break the confirmation bias. If he talks to me, we think very similarly, he thinks he will hear, “Oh yes, this is a great idea.” But to break the confirmation bias, he has to talk to somebody who thinks differently. So he seeks out somebody who he thinks has more divergent or skeptical opinions and is good at pointing out flaws in ideas.

Kunal: Now, this is an interesting trait to build. Generally, you need to have multiple APIs (application programming interface) in your life to make great decisions. One of them is the API of people who don’t think like you. Every founder eventually surrounds themselves with an echo chamber. And surprisingly, you will realize that sometimes your team members will say the same sentence you told them months ago. And you’ll be like, “That’s my sentence you’re telling me back.” And if… for a lot of founders who are purely narcissistic, they love this because they love that, “Oh sh*t! Everybody seems to be saying what I’m saying.” But, the truth is the best founders are the ones who will go and create this distortion for themselves by saying, “Hey, break this view. What am I not seeing right?” And I get insane paranoia when I can’t see a flaw in an idea that I’m working on. I get really paranoid because I can’t…I’m clearly missing something. And unless you build that paranoia APIs or skepticism APIs, or pessimism APIs in your life, you can get quite delusional. 

By the way, for all the founders who are quite pessimists in this group, you must be having…some of you must be having, usually [the solution] is to have optimist APIs, who can’t see flaws in things and [they] imagine possibilities, use them generously as well. 

Diverse teams make better decisions [59:25]

Shailendra: This idea of diversity of thought is a very powerful thing to improve decision-making. More diverse teams, over time, will make better decisions versus all… similar thinking teams will have similar blind spots. So, you know, diversity of thought is a very powerful thing. 

I won’t spend more time on this. Kunal and I both talked about this, you know, hire people who are more right. Groom your good decision makers, [that’s] very powerful. People who are good decision makers in your team are very powerful.

Kunal, you should talk about behavioral psychology. Too much of the world did engineering and therefore knows analysis. At least the people who are in the startup world, by far the most number of them are engineers. And they all understand logic and linear thinking very much. And they all systematically under-appreciate behavioral psychology, and Kunal is a student and master behavioral psychologist. Kunal, do you want to add a few thoughts on this? 

An understated strength: Understanding human behavior [01:00:19]

Kunal: No, I think it’s hard to cover this topic in a session, in general, but, I must tell you one thing guys that every single customer, every single employee, every single investor, regulator, anybody you deal with, are all humans. And unless you do not spend time and understand how human behavior works, you will nearly not progress much. And don’t rely on natural instincts to figure this out. There is enough science out there to understand how humans behave and how humans get motivated to do what they do, and how humans change their behavior. 

And don’t look for just one book in life that will make you an expert on human behavior because there is no such book. It’s an evolving thing. But it’s something that you have to be deliberate about becoming great at. And all the education system has done nothing to us because humanities was usually looked down upon because it did not give enough income compared to, let’s say, working in STEM-based education.

So my request is that, now is a time for you to build this muscle because life will become 20x easier if you know how humans behave and how humans operate. And you will start realizing most people, including yourself, are not logical. And that will automatically change the way you make decisions or the way you promote your product, the way you start communicating and it’s scary.  

Shailendra: I want to highlight one more thing. I think too many people who have done engineering degrees love to do analysis [and] come up with an answer. Like Indians tend to be pretty argumentative about “my analysis, your analysis. This is what the data says…” I keep reminding our team, I keep reminding all the founders, “Look, there are no guarantees,” Like Jeff Bezos says, “There’s no guarantees.” All there are is probabilities. Life is a sequence of probabilities. Most people thought there was no probability there’ll be war. Most people thought there was no probability there’ll be a pandemic, but, and yet there are in the world, but all you can do, as a good leader as a good founder, is that you can probabilistically make good decisions. You know, there are no guarantees. X maybe a good investor or a bad investor for you, it’s not clear. You can try to increase the probability by doing reference calls and you can go buy a good firm and you can see if you have chemistry with the person and increase the probability that that investor is good for you.

The same applies to the team member you hire. There’s no guarantee a person with a great pedigree in a big company fails miserably in a startup, because you just went by pedigree and you hired somebody who wasn’t going to be a good fit. And even if they were going to be a good fit; by the way, sometimes people had a great friend thinking I have so much trust and relationship and that bombs badly. 

So, good decision-making will allow you to have a 360 degree view. Good decision-making will allow you to increase the probability of getting decisions right. But there still won’t be any guarantees. And I think that’s very important to embrace this idea that some percentage of their decisions are not going to work out.

That’s the only way you can keep an open mind and keep recalibrating. The problem is too many people believe that their decisions are right or their way is right. Or that somehow magically they will make a perfect decision. It doesn’t work like that. I feel like embracing probabilistic decision-making is step one to being open-minded and evolving and then also quickly recalibrating, so that you can do stuff differently. I don’t know Kunal, you want to add to this? 

Kunal: I think this is an interesting thing. It’s very hard for me to…because I have not studied engineering… to kind of be very scientific about this and it helped me a lot, I am a Philosophy Major doing tech business in India. I’m probably the only humanities founder, if I can recall [correctly], in India which sort of becomes an edge in some ways. I believe that as you work on probabilistic thinking, you become better on building ‘gut’ as we call it, right. And think about the gut as something that makes you uncomfortable in the stomach when you’re making a decision. Right? And as you do more of them, you become better at them automatically because there are so many things that you have put in your head, but you don’t know how you process, but we are just right.

The point over here is that when you start going from 100% information to make a decision to 80, if you become good at level 80, then you can become good at level 70. And people who become good at level 70 will eventually become good at level 60. And you’ll be surprised. Some people who can go deeper and can be even great at level 10 or level 20, think about investing in a pre-product startup. How do you get it right? There’s literally no information, no data, no traction.

I still remember pitching CRED, which had nothing, literally, except a thought and a vision on what it could be. And over a period of time, you start building up a probabilistic model of saying that, “This can’t go wrong.” And that’s where a lot of you will have to become good at it. And it does not come…IQ (intelligence quotient) is your enemy to be good at probabilistic thinking, sometimes. 

Shailendra: Yep. I agree with that. I think people overthink stuff. We are all too smart for our own good. We are all very likely to overthink stuff. Keeping stuff simple is super powerful. 

I’ve already discussed this long-term decision-making. Kunal and I have talked about this a lot. A lot of us are guilty of very quickly, superficially deciding on stuff. This idea of second, third order thinking [is] a very powerful hack, “If I do this, what will happen next? If I give this person a raise will other people not get upset by it because they didn’t get it.” Like how does one decision impact so many other things?

This is the one part that I think leaders, especially when you’re tactical or you’re pushed to the wall and you’re like, “Okay, I need to do this for now. And I’ll live with the consequences of what comes later”, when you do that, you have just taken away the power of the second order effect or the third order effect and failed to calibrate how it’s going to impact you long term. Which is why going back to saying, “Will you be happy you did this two years later? Or will you be sad if you did this two years later” is a very powerful framework. 

Kunal and I say this all the time. A lot of people say, “My idea was stolen. My idea was copied.” I mean, most ideas have existed before. Like, nobody comes up with really…there aren’t that many original ideas, everything more or less has been thought by somebody else before, because there are seven billion people on the planet. A lot of our founders say “I have a unique idea,” mostly what they have is they have a new way to connect dots. So it’s not like a lot of new ideas exist, but sometimes people have connected a dot. They may have used something they found in the consumer and applied it to something else that becomes their new idea. 

Actually, that’s what is much more common around us. The way to innovate is not necessarily coming up with new ideas, but by connecting dots from different disciplines, different things to what you might have learned about user engagement in consumer [segment], you will apply it to something in enterprise and so on.

Kunal: I think let’s talk a bit about connecting dots, Shailendra. It’s an interesting point that you just talked about. Many times we do not like random curiosity, “I’m building a beauty startup app, nothing to do with SaaS (software-as-a-service). I’m building a gaming startup app, nothing to do with FinTech.” You will find extraordinarily great ideas that you can apply…So one practice that you should do across the company is to understand other businesses by letting the team present, “Well, why don’t you deep dive on Stripe, why don’t you deep dive on Peloton. Why don’t you deep dive on something else?” And then, end the session by asking, “What can we apply from this in our business?” 

If you do this on a ritualistic basis, on a weekly basis, A, your team will become randomly curious and collect dots. Then you can be given the honor to connect dots. And you will see some people are just natural [at it], only 1% will be good at connecting dots but 90% of people can be used for collecting dots. And eventually you can graduate more people to connecting dots because they will see patterns that most people cannot see.

Shailendra: Good decision-making can’t happen by staying narrow in many zones. If you narrowly know only one area or they’re good at only one thing, you will be good at decision-making in that area. So, eventually to be good at decision-making, you need a multitude of experiences, multitude of knowledge. By the way, most founders, the best founders, ask you, “Why do you do angel investing?” All of them will give you the same answer. They do it for learning. The best way to learn about how so many startups are being built is by angel investing. Kunal, do you agree?  

Kunal: That’s the only reason I invest, how the hell do I know how the world is evolving, if I am not constantly investing? The good news is that it’s a symbiotic relationship. I can share everything that I know. I’m like a router of insights from different industries. And I’m the connector of dots as an API available. And that helps me also collect dots from different places and you see very interesting patterns. I see so many interesting patterns between beauty and EdTech. I start seeing real money gaming and FinTech having correlations because suddenly when you are going deeper into insights, you’ll see everything is just connected, because everything is connected to human behavior. 

Shailendra: And to Kunal’s point, a lot of people somehow, in the name of focus, suppress their curiosity, but that hurts their judgment and decision-making in the mid to long-term, saying, “Oh, I’m just focused on my business”, but candidly, I don’t think they will have the best wide aperture of judgment eventually. Because you may not even learn about…you may connect the dots about business models, you may connect the dots about leadership, about how to hire, you may connect the dots about how to fire someone, you may connect dots about pricing or something else, which may still have a profound impact on how you think about building your company. 

Creative people can get in the flow. Flow theory basically says you can have zones of hyper-creativity, hyper-performance, ultra clarity. It’s a very well-known concept. You can Google this idea of zone theory. People in the zone can be hyper-productive. Your brain will suddenly have a burst of clarity and so on. And this is what Kunal was referring to: Unless you figure out how you can be in the zone when you have to make important decisions, if you make them under pressure, if you make them with less sleep, if you make them with your back to the wall, you’re always going to make bad decisions. You have to find ways to give yourself the time and space to make better decisions. The best creative ideas come when people are in the zone, when they’re in, as they call it, in the flow.

So this idea of zone theory and flow theory, again, I would urge you guys to go think about this a little bit, or research it if you’re interested and you can read up on it, there are research papers published. And a lot of people… People in the zone or in the flow experience timelessness, experience intense pleasure actually ideating. And this is a real thing. 

Under great… Even athletes, when they are playing a final, or when you’re running a race and you’re running the final of the Olympics, athletes also will experience this idea of being in the zone. Like the full brain, everything is highly hyper-aligned and in business also, great business leaders can get themselves into the zone or into the flow when they need to. Think of this as part of your arsenal of great decision-making, ability to be in the flow, ability to think creatively and so on, or connect dots. And like Kunal says, the difference between collecting and connecting dots, very profound.

Another way of innovating that people forget is that a lot of businesses start with a beachhead. They find a wedge in a market, like, CRED founder wedged in the market in bill payments. But then they get stuck building that wedge. They just say, “Oh, let me do more bill payments. I’ll just keep doing more and more bill payments.” So a lot of business innovation happens through finding a wedge. Sometimes your business leader finds a wedge, but you fail to capitalize on it. So if you don’t have the alertness to even observe the dots, you can never connect the dots. So collecting, observing, or collecting dots – super important. 

A lot of innovation starts with this idea of finding a wedge, but then you have to mutate fast to build a business around it. So a lot of people fail to do this. I find a lot of founders that get stuck in the tactical thing that got them started and they treat that as success because that tactical thing leads them to raise one or two rounds of financing. Then they keep doing more and more of the same. 

So I think it’s just super important that you have the ability… and this is when, like Kunal said, “you can get on the board versus stay off the board” and think about Act Two. The second thing I will say about innovating and about making changes to your journey and evolving is… this is a picture of ‘Burn the Ships’. So eventually building a business, everything you decide, everything you want to be is going to be tested. It’s going to come down to courage, it’s going to come down to resolve. It’s going to come down to your commitment, massively. If you have not been tested, you will be tested. Your resolve will be tested. And by the way, the bigger the business you build, the more you will be tested. Your person will be tested. Courage will be tested. Resilience will be tested. Patience will be tested, repeatedly. 

So one part of this is being smart and understanding the chessboard, making good decisions, having creativity, nimbleness, openness to learning. The second part of this is, “Who are you? Are you willing to have this resolve, this spine of steel and know when you should stand your ground?” As a founder, you may be bullied by a bigger competitor. You may see a price war. You may be bullied by an investor. Having this courage and resilience is equally an important part of staying the course in tough times. And everybody will face some tough times. So I just wanted to say that, and sometimes you’ll have to back your judgment and go all in. You will really just have to back your judgment and go all in. Kunal, you may want to talk about the marketing campaign you did at Freecharge that changed the company’s journey.

Kunal: So the story goes, we were left with, I would say, less than a million dollars of money with us and actually even lesser than that. And we signed up to a campaign along with Pepsi, which was going to give… So, Freecharge was an app, which gives you a platform to give you rewards for paying your mobile bills or recharge to do that and, it was built around that. 

And we built a campaign with Pepsi where every Pepsi bottle would have talk-time in it and Freecharge was going to sponsor that. And we convinced Pepsi to do a large media campaign with four top celebrities to say that every time you buy a Pepsi, you get talktime to a minute and technically your Pepsi becomes free. And the total amount of money that we could have burned, if everybody redeemed that Pepsi bottle was close to, if I’m not mistaken, $10 to $15 million. 

So I remember, Shailendra calling me that, “Kunal, You’re like really signing up for this? We don’t even have money to survive for six more months, if you don’t figure out something else in life.” And I’m like, “Trust me, this is the best thing I’m doing for the company’s growth.” And funny enough, even Pepsi agreed to this, to work with a startup. And the funny thing is that we grew like multiple x, maybe 6-7-8x, with this one campaign. And it could not cost us as much, we got much lower redemptions than we thought, but it took us as a brand to a different trajectory. But it was absolutely all in. We could have just shut down.

The point over here is that nobody will be able to make these decisions except you guys. The all-in decisions are on you guys, nobody else can make it. Even your board cannot make it. They can guide you and they can caution you, but ultimately they’ll back you if they feel the conviction in your eyes that you are right. And sometimes the consequences of that are either you’ll have a step function, jump, or you will die. Every now and then such decisions will come. 

Embrace accidental innovations [01:17:45]

Shailendra: Crucible textbook moment. Look, the last one is serendipity. A lot of things will happen through serendipity. Most people are not mentally ready to embrace serendipity, which is that there is that accidental innovation in every company. You thought you were doing X, but the second, third order effect that you did not expect suddenly starts to play out. And you’re like, “Wait, I have a real business here.” A lot of people stay stuck to why they thought they were doing it. And I’m not listening to what the data is telling them or what their customers are telling them. Accidentally innovation is a very powerful thing. 

I don’t know if you guys know this, Cognizant, which is a $40 billion company, was the outsourcing center of a company called Dun & Bradstreet. It was the India outsourcing arm of Dun & Bradstreet. Okay. Now, dozens of American companies had bigger outsourcing arms than Cognizant at the time, but one company said, “Hey, I have this cost center. Should I try to convert it into a profit center and give incentives to the leadership team to convert it into an entrepreneurial venture.” That became a top three or top five outsourcer from India. And every other company didn’t do that. 

So sometimes there is all this capability and innovation sitting around the corner and people only…Some people fail to connect those dots or actually take that chance and bring the courage to that idea. But other people don’t. And that’s why I believe in Kunal and I always talk about this. It’s crazy. When you can see opportunity, it’s crazy. You will see opportunity in broad daylight for a living once you start connecting dots. And Kunal is laughing again because he and I keep…We will do these jamming sections. Okay. And we will say, okay, what are the list of 10 unicorn ideas? And we just can’t believe how [many] low hanging fruit opportunities are still in the world.

Because once you start connecting the dots, it becomes straightforward and easy to say, “Like, wait!” I’ll give you an example. In 2005, I had a business idea to do peer-to-peer lending, that’s how I actually originally connected with Sequoia. And I thought to myself, the company that will do the best credit scoring should be LinkedIn. Because they had people’s, you know, academic and work profiles and titles and work histories and so on and so forth. To this day, LinkedIn has never done credit scoring. Now that’s an idea of applying one type of learning to another type of learning, but I’m just telling you guys you can do so many different things that are still unexploited business ideas once you start connecting dots. 

Anyhow, so, look, the next decade for all of you in summary. This is the last slide. It’s going to be a function of company design choices and how well you play chess, constantly learning and evolving, moats, new moats and so on. Your talent density and evolution, your alignment and teamwork, key decisions in crucible moments, and your commitment is all encouraged during tough times. And then some serendipity and luck, which is a core part. These five, six things will disproportionately impact and compound over the next 10 years for you guys. And today’s session is meant to give you a little bit of a heads up and thinking now.

Shailendra: Sorry, we haven’t done enough Q&A, so we want to make sure we can give you guys a chance to ask Kunal questions.

Audience Q&A [01:20:53]

Kunal [reading a question from the audience]: How do you hire people that don’t think like you? Do you have a framework? Normally people have a bias to hire people like themselves. 

That’s a great question. I think the intent is to not hire people who don’t think like you, but have differences in their journey. Most great people will arrive at the same conclusions. But their paths may be different. So you want to hire people who have different paths to arrive at great decisions. Great decisions are always similar, right? They’re not different. And therefore you want people who have differences in their journeys versus a difference in the decisions that they will make, because what you’ll notice is that all the people who make great decisions are usually agree on the great decision. So you want to find people with different journeys versus different thinking naturally, because a lot of the time people agree a lot when they see something versus having a different point of view. And difference of experiences is a huge factor, like what has been your journey? 

Kunal [reading a question from the audience]: Do you have a recommendation on non-fintech industry companies that will be needed to study for insight that can be used for FinTech business? 

Kunal: Venkat (Paruchuri), every single company is a FinTech company. If you have not figured it out by now. My request is to process every single company. Gaming companies are extraordinary FinTech companies. They run on the coin economy as a core concept and they hire economists who run the best games. So if you’re really waiting at, “Oh, what is this stupid Candy Crush, how can I learn FinTech from it?” I can tell you that they probably know FinTech better than most people because they operate on understanding economies in general.

So I would request to not look for shortcuts in life, which two industries will I learn from, every single thing that is successful has lessons for you. And if you create a culture to go probing across the board, you’ll become better at it.

Nishant Mittal (PingSafe): So, Kunal we are building PingSafe, which is in the cybersecurity domain. So basically we alert companies about any loophole in their cloud infra. So we are supposed to reduce the anxiety and stress level of our users but every mail or maybe automated slack message that we send out to our users basically increases the stress level. So how do we basically balance it out?

Kunal: My request is that engagement content should make me smarter, better, and not increase my anxiety, but the core utility… For example, CRED also alerts you when you find a hidden charge on things, but that’s not our only communication. We constantly positively reinforce a lot of things that you do. For example, if you send me a message every day that your system is safe, I will love that. And so, you can reduce anxiety by saying things are safe also. 

Divyesh Dixit (Bamboobox): So, Kunal, my question is more generic and it is about the biggest moat. Which company do you, which is not in the league of Apple and Google, which you admire for business moats? Obviously, we don’t want to hear about CRED in this category.

Kunal: I don’t think CRED has built its moat to get there. It will get there. We are working towards it. But beautiful things like…if you think about Visa, MasterCard, UPI, are crazy network effects as businesses. If you think about gold and anything around gold businesses have unique moats because the product has a strong moats by itself. My examples are more unusual. The best examples of moats are not in companies. They’re in life.

Kunal [reading a question from the audience]: Do you find you make better decisions when you don’t take stakes too seriously?

Sohel (Sanghani), absolutely. Yes. Detachment is key to making great decisions. But attachment is a great way of feeling something needs to be done. Let’s take an example. Attachment is when you will know that, okay, somebody that you love needs to go through some change or let’s say, some medical thing. You will feel it, you’ll feel something is off with them. But, “Oh! Should we do the surgery or not” is best done with detachment versus attachment to this person, because you’ll never be able to make good decisions about that. So attachment is a great way to find which are the most important decisions to make. Detachment is a great way of building a good conviction on decisions I should make because attachment will never allow you to make good decisions.

Shailendra: Duality of attachment and detachment. On that note, Kunal, thank you so much. Really appreciate it. 

Kunal: Thank you guys. See you. 

This transcript has been edited for clarity.